While organised retail is looked upon as a threat to kirana (small, standalone) outlets, retailers’ private brands have come as a boon for small vendors in the food and beverage processing sector.
Retailers annual contract manufacturing orders to vendors run in crores. For instance, the Future Group has engaged 40-45 contract manufacturers and its annual bill to its biggest vendor is Rs 17 crore. Aditya Birla Retail has 48 contract manufacturers to manufacture its 279 product lines and its average annual bill to each vendor is Rs 1 crore.
The trend has also worked as a catalyst for vendors in attracting FMCG (fast moving consumer goods) companies to them. Companies are now hiring the same vendors as employed by retailers. For instance, HUL’s newly launched Knorr noodles is manufactured by Magic Foods, a vendor of Future Group.
Quality assurance
One reason could be quality assurance, say vendors. The retailers have helped them put up required systems in place, which then attracted FMCG companies to hire the same vendors on account of quality. “We have people who have worked with Marico, HUL, Coke, McDonalds, etc, who work closely with vendor partners and support them to add systems, processes and certification so they move up the value chain,” says Devendra Chawla, Head of Private Brands – Food and FMCG, Future Group.
While not a new trend for FMCG companies, the instances have increased significantly. Companies have other priorities, looking at the fierce competition in the sector. Industry analysts say rather than dedicating a big team to look after manufacturing, companies are now entrusting the workforce to other jobs like brand building exercises, consumer insights, packaging design/solutions and working on how to grow categories and increase penetration in under-penetrated categories. A small team can work with vendor partners on manufacturing, quality control, and consistency of the product.
Two-way process
In some cases, retailers have rescued small vendors from going out of business. “FMCG companies started going for contract manufacturing since the early 80s. The current trend for them is of consolidation and going in-house, with many of them having set up plant in fiscal-benefit locations (like Baddi in HP). It is the other way for us, as we get an advantage of getting process-oriented and established vendors,” says Thomas Varghese, CEO, Aditya Birla Retail.
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On account of increasing business, some vendors are now planning to expand their manufacturing capacity. Vijay of Indra Foods, who gets 25 per cent of his annual business from retailers, is one. He makes Tasty Treat ketchups and sauces for Future Group and More Ketchups for Aditya Birla Retail. “We earlier used to make ketchups for the Future Group. Then, Aditya Birla Retail and Yum Restaurants also joined our client list. Now we are building more capacity to meet the demand,” he says.
Another manufacturer based in Maharashtra agrees, “Retailers have certainly increased our business significantly. At present, 10 per cent of our business comes from retailers’ private brands and it is constantly increasing.” He manufactures Fresh & Pure dairy products for the Future Group and a number of FMCG companies like Nestle, Britannia, GSKCH, HUL and PepsiCo are his clients. He, too, is planning to expand his manufacturing capacity.